5 Ways to Lose Investors in Under 3 Minutes

The opening of your investor pitch is critical. Flounder and you might lose a venture capitalist's attention from the start. Here are five missteps VCs look out for when sitting down with entrepreneurs.

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If you think it's hard being an entrepreneur trying to raise
money from a venture
capitalist, consider the challenges facing the VC. It's
typical for a VC to meet with between 500 and 1,000 entrepreneurs
a year and invest in two or three companies at most. That means
investors --
who may take about 60 minutes with each entrepreneur -- meet with
a lot of people whose companies they never fund.

But just because you have someone's attention for an hour,
doesn't mean the pitch
is going well. In the pitches I have listened to over the last 15
years, I've shared the tension VCs feel when they want to shut
down the conversation after a few minutes but feel obliged, out
of politeness, to stay silent. Within the first three minutes of
meeting an entrepreneur, a VC decides whether the next 57 minutes
are going to be excruciating or whether he will want to spend
four more hours with the entrepreneur.

From my own experience, I can tell you there are five missteps
that can knock you out of investment contention in the first
three minutes of a pitch:

1. A long-winded
introduction. Entrepreneurs can become very
self-absorbed with the pressure of running a company and forget
that others may not be as familiar with their business as they
are. At the same time, a VC usually has spent decades in the
technology business and thus knows the industry very well.

Entrepreneurs should start off their pitch with concise,
simply-worded answers to four questions:

What problem is your venture trying to solve?

Why is this problem painful to potential customers?

How will you solve that problem better than the competition?

Why are you passionate about solving the problem?

I have sat through numerous pitches that appear to be solutions
in search of a problem. If there is one difference between
passable pitches and winning ones, it's an in-depth understanding
of why the customer will buy the product.

2. Lack of credibility. If you have already sold
or taken another venture public, you are likely to have an easier
time getting a VC's attention. If you are a first-time
entrepreneur, VCs will bet on you only if they believe you have
the potential to become a CEO.

How to do that if you don't have a track record? Were you a
winner in a sport or did you excel academically? These are just
two ways to showcase your leadership and success. If you don't
demonstrate that you know what it feels like to win, VCs will
quickly lose interest.

3. Weak team-building. The ability to attract
and motivate an excellent team is a skill VCs want to see. For
example, you want your lead engineer and sales person to have
track records of new product development and rapid sales growth.

Communicating this to a VC is simple if you have the goods. In my
conversations with startup CEOs who create winning teams, they
brag about the famously successful products their chief engineers
designed or the fast-growing companies their VP of sales helped
transform.

If a VC decides you have pulled together a weak team for your
startup, he will seriously question your judgment.

4. Asking for the wrong amount of money. You
should take a rigorous approach to analyzing the markets into
which you're selling. That means that before you, say, ask a VC
for $10 million, you should be able to demonstrate the market is
big enough to generate a return on such an initial investment.

While the basic math required to do this is fairly simple, the
real challenge is making it clear that your market is big enough
to make the numbers work.

As a rule of thumb, VCs typically expect the maximum market share
a startup gets to be 10 percent and that in order to go public or
realize a meaningful exit, you will need to generate at least
$100 million in sales.

That means a startup's addressable market would need to be at
least $1 billion. In my experience, startups tend to say their
market will reach at least $20 billion -- citing studies by
research firms like IDC or Gartner -- and that they are going
after, say, a 10 percent segment of that market. Although I
recommend this approach for information technology startups, a
biotech startup has much higher capital requirements. Each
entrepreneur must figure out the right numbers for their
business.

5. Undemonstrated potential to be a market
leader. The way to convince a VC that you will become a
market-leading company by getting that 10 percent share, is to
show you have deep insight into the customer problem your startup
is trying to solve. You should be able to explain the specific
criteria customers use to evaluate products that compete with
yours and describe why your product wins on these key attributes.

If you can't convince a VC your startup will get that big, you
should seek other sources of funding.